<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
      X           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
------------      OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2000

                                       or

               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

             For the transition period from __________to ___________

                         Commission File Number 0-12950

                          ALLIANCE PHARMACEUTICAL CORP.
             (Exact name of Registrant as specified in its charter)

NEW YORK                                     14-1644018
---------------------------------            -------------------------------
(State or other jurisdiction                 (I.R.S. Employer
of incorporation or organization)            Identification Number)

3040 Science Park Road
SAN DIEGO, CALIFORNIA                        92121
---------------------------------            -------------------------------
(Address of principal                        Zip Code
executive offices)

Registrant's telephone number,
including area code:                         (858) 410-5200
                                             -------------------------------

Indicate by a check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.

Yes  X                                    No
    ---                                      ---

As of November 1, 2000, Registrant had 48,238,953 shares of its Common Stock,
$.01 par value, outstanding.

<PAGE>


ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES


INDEX

                                                                       PAGE NO.

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

     Condensed Consolidated Balance Sheets                                 3

     Condensed Consolidated Statements of Operations                       4

     Condensed Consolidated Statements of Cash Flows                       5

     Notes to Condensed Consolidated Financial Statements                  6

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                     7

Item 3.  Quantitative and Qualitative Disclosures About Market Risk       12

PART II - OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds                        12

Item 6.  Exhibits and Reports on Form 8-K                                 12


                                       2

<PAGE>

PART I FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

     ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
     CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                    SEPTEMBER 30,                 JUNE 30,
                                                                                        2000                        2000
                                                                                -----------------------    -----------------------
                                                                                    (UNAUDITED)                   (NOTE)
     <S>                                                                          <C>                           <C>
     ASSETS

     CURRENT ASSETS:
         Cash and cash equivalents                                                $   27,015,000                $   28,721,000
         Short-term investments                                                          822,000                     4,806,000
         Other receivable                                                              3,908,000                     1,046,000
         Research revenue receivable                                                           -                       146,000
         Other current assets                                                            472,000                       276,000
                                                                                -----------------------    -----------------------
                   Total current assets                                               32,217,000                    34,995,000

     PROPERTY, PLANT AND EQUIPMENT - NET                                              19,287,000                    20,309,000
     PURCHASED TECHNOLOGY - NET                                                        9,774,000                    10,065,000
     RESTRICTED CASH                                                                   5,000,000                     5,000,000
     INVESTMENT IN JOINT VENTURE                                                       5,000,000                     5,000,000
     OTHER ASSETS - NET                                                                  539,000                       580,000
                                                                                -----------------------    -----------------------
                                                                                  $   71,817,000                $   75,949,000
                                                                                =======================    =======================

     LIABILITIES AND STOCKHOLDERS' EQUITY

     CURRENT LIABILITIES:
         Accounts payable                                                         $    4,628,000                $    4,983,000
         Accrued expenses                                                              2,701,000                     4,101,000
         Deferred revenue                                                             10,000,000                    10,000,000
         Current portion of long-term debt                                             4,667,000                     4,586,000
                                                                                -----------------------    -----------------------
                   Total current liabilities                                          21,996,000                    23,670,000

     LONG-TERM DEBT                                                                   27,626,000                    19,013,000

     STOCKHOLDERS' EQUITY:
         Preferred stock - $.01 par value; 5,000,000 shares authorized; 500,000
              shares of Series F issued and outstanding at
              September 30, 2000 and June 30, 2000                                         5,000                         5,000
         Common stock - $.01 par value; 75,000,000 shares authorized; 47,695,971
              and 47,233,454 shares issued and outstanding at
              September 30, 2000 and June 30, 2000, respectively                         480,000                       472,000
         Additional paid-in capital                                                  408,377,000                   402,470,000
         Accumulated comprehensive income (loss)                                         364,000                     3,510,000
         Accumulated deficit                                                        (387,031,000)                 (373,191,000)
                                                                                -----------------------    -----------------------
                   Total stockholders' equity                                         22,195,000                    33,266,000
                                                                                -----------------------    -----------------------
                                                                                  $   71,817,000                $   75,949,000
                                                                                =======================    =======================
</TABLE>

     Note:    The balance sheet at June 30, 2000 has been derived from the
              audited financial statements at that date but does not include all
              of the information and footnotes required by generally accepted
              accounting principles for complete financial statements.

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       3


<PAGE>

      ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED
                                                        SEPTEMBER 30,
                                                    2000            1999
                                                ------------    ------------
                                                        (UNAUDITED)
<S>                                             <C>             <C>
REVENUES:
     License and research revenue               $     14,000    $  1,568,000

OPERATING EXPENSES:
     Research and development                     13,865,000      10,413,000
     General and administrative                    2,420,000       1,712,000
                                                ------------    ------------
                                                  16,285,000      12,125,000
                                                ------------    ------------
LOSS FROM OPERATIONS                             (16,271,000)    (10,557,000)

IMPUTED INTEREST EXPENSE ON CONVERTIBLE NOTES     (1,082,000)           --
INVESTMENT INCOME                                  4,231,000         210,000
INTEREST EXPENSE                                    (718,000)       (373,000)
                                                ------------    ------------
NET LOSS APPLICABLE TO COMMON SHARES            $(13,840,000)   $(10,720,000)
                                                ============    ============

NET LOSS PER COMMON SHARE:
  Basic and diluted                             $      (0.29)   $      (0.25)
                                                ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic and diluted                               47,541,000      43,510,000
                                                ============    ============
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       4


<PAGE>

     ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                           2000           1999
                                                                       ------------    ------------
                                                                               (UNAUDITED)
<S>                                                                    <C>             <C>
OPERATING ACTIVITIES:
   Net loss                                                            $(13,840,000)   $(10,720,000)
   Adjustments to reconcile net loss to net cash used in operations:
      Depreciation and amortization                                       1,556,000       1,811,000
      Imputed interest expense on convertible notes                       1,082,000            --
      Expense associated with warrant issuance                              210,000         144,000
      Gain on sale of equity securities                                  (3,723,000)           --
      Changes in operating assets and liabilities:
         Research revenue receivable                                        146,000       2,636,000
         Other assets and other receivable                               (3,017,000)        (44,000)
         Accounts payable and accrued expenses and other                 (1,740,000)     (2,497,000)
                                                                       ------------    ------------
Net cash used in operating activities                                   (19,326,000)     (8,670,000)
                                                                       ------------    ------------

INVESTING ACTIVITIES:
   Sales and maturities of short-term investments                         4,561,000            --
   Property, plant and equipment                                           (243,000)        (83,000)
                                                                       ------------    ------------
Net cash provided by (used in) investing activities                       4,318,000         (83,000)
                                                                       ------------    ------------

FINANCING ACTIVITIES:
   Issuance of common stock                                               2,191,000          17,000
   Proceeds from long-term debt                                          12,000,000            --
   Principal payments on long-term debt                                    (889,000)     (1,174,000)
                                                                       ------------    ------------
Net cash provided by (used in) financing activities                      13,302,000      (1,157,000)
                                                                       ------------    ------------

DECREASE IN CASH AND CASH EQUIVALENTS                                    (1,706,000)     (9,910,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         28,721,000      19,081,000
                                                                       ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                             $ 27,015,000    $  9,171,000
                                                                       ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid                                                       $    536,000    $    315,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
   Deferred interest expense on long-term debt                         $       --      $     63,000
   Issuance of common stock upon conversion of notes                   $  2,600,000    $       --
</TABLE>


                                       5

<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

         Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company" or "Alliance") are engaged in identifying, designing, and developing
novel medical products.

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., the accounts of its wholly owned subsidiary Astral, Inc.,
its wholly owned subsidiary MDV Technologies, Inc., its wholly owned subsidiary
Alliance Pharmaceutical GmbH, from its inception in December 1998, and its
majority-owned subsidiary Talco Pharmaceutical, Inc. All significant
intercompany accounts and transactions have been eliminated. Certain amounts in
2000 have been reclassified to conform to the current year's presentation.

INTERIM CONDENSED FINANCIAL STATEMENTS

         The condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of operations for the three months ended
September 30, 2000 and 1999, and the condensed consolidated statements of cash
flows for the three months ended September 30, 2000 and 1999 are unaudited. In
the opinion of management, such unaudited financial statements include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of the results to be expected for the full year. The
financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 2000.

PURCHASED TECHNOLOGY

         The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
1989. The technology acquired is the Company's core perfluorochemical ("PFC")
technology and was valued based on an analysis of the present value of future
earnings anticipated from this technology at that time. The Company identified
alternative future uses for the PFC technology, including the OXYGEN-TM-
(temporary blood substitute) and LIQUIVENT(R) (intrapulmonary oxygen carrier)
products.

         The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. The PFC technology has a
net book value of $9.8 million and $10.1 million, and is reported net of
accumulated amortization of $13.5 million and $13.2 million at September 30 and
June 30, 2000, respectively.

         The carrying value of purchased technology is reviewed periodically
based on the projected cash flows to be received from license fees, milestone
payments, royalties, and other


                                       6
<PAGE>


product revenues. If such cash flows are less than the carrying value of the
purchased technology, the difference will be charged to expense.

COMPREHENSIVE INCOME (LOSS)

         Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, Comprehensive Income ("SFAS No. 130"). SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS No. 130 had no impact
on the Company's net loss or stockholders' equity. SFAS No. 130 requires
unrealized gains and losses on the Company's available-for-sale securities to be
included in comprehensive income. During the three months ended September 30,
2000 and 1999, the total comprehensive loss, which includes the unrealized loss
on available-for-sale securities, was $16,986,000 and $10,720,000, respectively.

NET INCOME (LOSS) PER SHARE

         The Company computes net loss per common share in accordance with
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 requires the presentation of basic and diluted earnings per share
amounts. Basic earnings per share is calculated based upon the weighted average
number of common shares outstanding during the period while diluted earnings per
share also gives effect to all potential dilutive common shares outstanding
during the period such as common shares underlying options, warrants, and
convertible securities, and contingently issuable shares. All potential dilutive
common shares have been excluded from the calculation of diluted earnings per
share as their inclusion would be anti-dilutive.

2.  SUBSEQUENT EVENT

         In October 2000, the Company entered into an agreement to acquire all
shares of Molecular Biosystems Inc. ("MBI") in exchange for 770,000 shares of
Alliance stock, subject to adjustment downward under certain circumstances. MBI
is the developer of Optison(R), an intravenous ultrasound contrast agent being
marketed in both the United States and Europe. The proposed acquisition of MBI
is subject to the approval of MBI's shareholders.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
(References to years are to the Company's fiscal years ended June 30.)

         Since commencing operations in 1983, the Company has applied
substantially all of its resources to research and development programs and to
clinical trials. The Company has incurred losses since inception and, as of
September 30, 2000, has an accumulated deficit of $387 million. The Company
expects to incur significant losses over at least the next few years as the
Company continues its research and product development efforts and attempt to
commercialize its products.

         The Company's revenues have come primarily from collaborations with
corporate partners, including research and development and milestone payments.
The Company's expenses have consisted primarily of research and development
costs and administrative costs. To date, the Company's revenues from the sale of
products have not been significant. The Company believes its future operating
results may be subject to quarterly fluctuations due to a variety of


                                       7
<PAGE>

factors, including the timing of future collaborations and the achievement of
milestones under collaborative agreements, whether and when new products are
successfully developed and introduced by the Company or its competitors, and
market acceptance of products under development.

LIQUIDITY AND CAPITAL RESOURCES

         Through September 2000, the Company financed its activities primarily
from public and private sales of equity and funding from collaborations with
corporate partners.

         In August and September 2000, the Company sold $12 million in principal
amount of four-year 5% subordinated convertible debentures to certain investors.
The debentures are convertible at any time at each investor's option into shares
of Alliance common stock at $13.32 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading market
price on the day the debentures were issued. As a result of this beneficial
conversion price, the Company recorded an immediate charge to interest expense
of $1.1 million on these convertible debentures. The Company will have certain
rights to cause the debentures to convert into common stock. The investors will
have the option at any time to purchase, and the Company will have certain
rights to require the investors to purchase, an additional $12 million of
four-year 5% subordinated convertible debentures, convertible into Alliance
common stock at $16 per share.

         In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and, in December 1997,
the amount available under the loan was increased to $15.2 million. In June
1998, the Company restructured the loan to provide for up to $15 million at the
bank's prime rate plus 0.5%. Amounts borrowed are secured by a $5 million
restricted certificate of deposit, by certain fixed assets and patents, and are
to be repaid over four years. If certain financial covenants are not satisfied,
the outstanding balance may become due and payable. On September 30, 2000, the
balance outstanding on this loan was $8.3 million.

         In May 2000, Alliance and Baxter Healthcare Corporation ("Baxter")
entered into a joint venture for the manufacture, marketing, sales and
distribution of OXYGENT in the United States, Canada and countries in the
European Union (the "Baxter Territory"). The companies formed PFC Therapeutics,
LLC ("PFC Therapeutics") to oversee the further development, manufacture,
marketing, sales and distribution of OXYGENT; and each party invested $5 million
in PFC Therapeutics. In connection with the transaction, PFC Therapeutics
obtained an exclusive license in the Baxter Territory, to manufacture and market
all of the Company's injectable perfluorochemical emulsions capable of
transporting oxygen in therapeutic effective amounts in the bloodstream,
including OXYGENT. PFC Therapeutics paid Alliance a prepaid royalty of $10
million, which has been recorded as deferred revenue. Alliance and Baxter will
also share in the distribution of PFC Therapeutics' future cash flows. Under the
arrangement, Alliance will continue to fund the current development plan for
OXYGENT'S initial approval in the Baxter Territory. PFC Therapeutics has a right
of first offer to license OXYGENT in one or more countries outside the Baxter
Territory. Pursuant to a manufacturing and supplier agreement between Alliance
and PFC Therapeutics, Alliance will initially manufacture OXYGENT for
distribution in the Baxter Territory. Under separate agreements between Baxter
and PFC Therapeutics, Baxter


                                       8
<PAGE>

will have the exclusive right to promote, market, distribute and sell OXYGENT in
the Baxter Territory, and Baxter has the right to take over the manufacturing
responsibility for OXYGENT. In connection with this arrangement, Baxter has
purchased 500,000 shares of the Company's convertible Series F Preferred Stock
for $20 million. In order for Baxter to maintain its rights to commercialize the
product, Baxter is required to purchase an additional $30 million of convertible
redeemable preferred stock from Alliance through September 2001.

         The Company had net working capital of $10.2 million at September 30,
2000, compared to $11.3 million at June 30, 2000. The Company's cash, cash
equivalents, and short-term investments decreased to $27.8 million at September
30, 2000, from $33.5 million at June 30, 2000. The decrease resulted primarily
from cash used in operations of $19.3 million and principal payments on
long-term debt of $889,000, partially offset by proceeds of $12 million from the
sale of convertible debentures and proceeds of $2.2 million from the exercise of
options and warrants. At September 30, 2000, the Company had other receivables
of $3.9 million relating to the proceeds from the sale of short-term
investments. This receivable has been subsequently received by the Company. The
Company's operations to date have consumed substantial amounts of cash and are
expected to continue to do so for the foreseeable future.

         The Company continually reviews its product development activities in
an effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the product
to market. Based on these and other factors, the Company may from time to time
reallocate its resources among its product development activities. Additions to
products under development or changes in products being pursued can
substantially and rapidly change the Company's funding requirements.

         The Company expects to incur substantial expenditures associated with
product development, particularly for IMAVIST-TM-, LIQUIVENT and OXYGENT. The
Company is seeking additional collaborative research and development
relationships with suitable corporate partners for its non-licensed products.
There can be no assurance that such relationships, if any, will successfully
reduce the Company's funding requirements. Additional equity or debt financing
may be required, and there can be no assurance that such financing will be
available on reasonable terms, if at all. If adequate funds are not available,
the Company may be required to delay, scale back, or eliminate one or more of
its product development programs, or obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, or products that the
Company would not otherwise relinquish.


         Alliance anticipates that its current capital resources, expected
equity investments by Baxter and expected revenue from investments will be
adequate to satisfy its capital requirements through at least fiscal 2001. The
Company's future capital requirements will depend on many factors, including,
but not limited to, continued scientific progress in its research and
development programs, progress with preclinical testing and clinical trials, the
time and cost involved in obtaining regulatory approvals, patent costs,
competing technological and market



                                       9
<PAGE>

developments, changes in existing collaborative relationships, the ability of
the Company to establish additional collaborative relationships, and the cost of
manufacturing scale-up.

         While the Company believes that it can produce materials for clinical
trials and the initial market launch for OXYGENT and IMAVIST at its existing San
Diego, California facilities and for LIQUIVENT at its Otisville, New York
facility, it may need to expand its commercial manufacturing capabilities for
its products in the future. Any expansion for any of its products may occur in
stages, each of which would require regulatory approval, and product demand
could at times exceed supply capacity. The Company has not selected a site for
such expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or whether
the U.S. Food and Drug Administration ("FDA") will determine that such
facilities comply with Good Manufacturing Practices. The projected location and
construction of such facilities will depend on regulatory approvals, product
development, and capital resources, among other factors. The Company has not
obtained any regulatory approvals for its production facilities for these
products, nor can there be any assurance that it will be able to do so. The
Company currently has responsibility for manufacturing Oxygent; however, Baxter
has the right to take over responsibility for manufacturing the product for sale
in the Baxter Territory. The license agreement with Schering AG, Germany
("Schering") requires the Company to manufacture products at its San Diego
facility for a period of time after market launch at a negotiated price.
Schering will be responsible for establishing production capacity beyond the
maximum capacity of the San Diego facility.

         Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2001, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the inability to obtain adequate financing for the Company's
development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such
relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process; and the uncertainties associated with
obtaining and enforcing patents important to the Company's business; and
possible competition from other products. Furthermore, even if the Company's
products appear promising at an early stage of development, they may not reach
the market for a number of important reasons. Such reasons include, but are not
limited to, the possibilities that the potential products will be found
ineffective during clinical trials; failure to receive necessary regulatory
approvals; difficulties in manufacturing on a large scale; failure to obtain
market acceptance; and the inability to commercialize because of proprietary
rights of third parties. The research, development, and market introduction of
new products will require the application of considerable technical and
financial resources, while revenues generated from such products, assuming they
are developed successfully, may not be realized for several years. Other
material and unpredictable factors which could affect operating results include,
without limitation, the uncertainty of the timing of product approvals and


                                       10
<PAGE>

introductions and of sales growth; the ability to obtain necessary raw materials
at cost-effective prices or at all; the effect of possible technology and/or
other business acquisitions or transactions; and the increasing emphasis on
controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the Securities and Exchange Commission from time to time,
including the last Form 10-K, and those risk factors set forth in the most
recent registration statement on Form S-3 (File No. 333-47032).

RESULTS OF OPERATIONS

         THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED WITH THREE MONTHS
ENDED SEPTEMBER 30, 1999

         The Company's license and research revenue decreased to $14,000 for the
three months ended September 30, 2000, compared to $1.6 million for the three
months ended September 30, 1999. The decrease was primarily a result of the
decreased research revenue from the license agreement with Schering. The Company
expects revenue to decrease in 2001 compared to 2000, primarily because 2000
included substantial revenue as a result of the sale of certain aspects of its
PULMOSPHERES(R) technology to Inhale Therapeutic Systems, Inc.

         Research and development expenses increased by approximately 34% to
$13.9 million for the three months ended September 30, 2000, compared to $10.4
million for the three months ended September 30, 1999. The increase in expenses
was primarily due to a $2.1 million increase in payments to outside researchers
for preclinical and clinical trials and other product development work, a
$826,000 increase in staffing costs for employees engaged in research and
development activities, as well as other increases related to the Company's
research and development activities.

         General and administrative expenses increased by 41% to $2.4 million
for the three months ended September 30, 2000, compared to $1.7 million for the
three months ended September 30, 1999. The increase in general and
administrative expenses was primarily due to increased salaries and wages and
professional fees.

         Investment income was $4.2 million for the three months ended September
30, 2000, compared to $210,000 for the three months ended September 30, 1999.
The increase was primarily a result of an increase in realized gains from the
sale of short-term investments.

         Interest expense was $718,000 for the three months ended September 30,
2000, compared to $373,000 for the three months ended September 30, 1999. The
increase was primarily a result of higher average long-term debt balances.

         For the three months ended September 30, 2000, the Company recorded
imputed interest expense of $1.1 million related to the beneficial conversion
feature on the $12 million subordinated convertible debentures.

         Alliance expects to continue to incur substantial expenses associated
with its research and development programs. Operating losses may fluctuate from
quarter to quarter as a result of


                                       11
<PAGE>

differences in the timing of revenues earned and expenses incurred and such
fluctuations may be substantial. The Company's historical results are not
necessarily indicative of future results.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is or has been exposed to changes in interest rates
primarily from its long-term debt arrangements and, secondarily, its investments
in certain securities. Under its current policies, the Company does not use
interest rate derivative instruments to manage exposure to interest rate
changes. The Company believes that a hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of the Company's interest sensitive financial
instruments at September 30, 2000.

PART II  OTHER INFORMATION:

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         On August 22, 2000, the Company sold $10 million principal amount of
convertible subordinated notes to Brown Simpson Partners I, Ltd., Narragansett
I, LP, Narragansett Offshore, Ltd., SDS Merchant Fund, LP, Castle Creek
Healthcare Partners LLC, CCL Fund LLC. On September 8, 2000, the Company sold an
additional $2 million of such notes to Jan A. Dekker. The securities convert at
any time upon the request of the holder into common stock of the Company at
$13.32 per share, subject to certain antidilution provisions. The investors have
the option to purchase an additional $12 million of similar debentures and
Alliance has certain rights to require the investors to purchase the additional
debentures. The investors are all accredited investors and the transactions were
exempt from registration with the Securities and Exchange Commission under
Section 4(2) of the Securities Act of 1933, as amended (the "Act") and
Regulation D promulgated under the Act.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         (i)      Form of 5% debenture (1)

         (ii)     Form of securities purchase agreement (1)

         (iii)    Form of registration rights agreement (1)

(1)      Incorporated by reference to the Company's Report on Form 8-K dated
         August 22, 2000

(b)      Report on Form 8-K

         The Company filed a current report on Form 8-K dated August 22, 2000
         stating that it sold $10 million principal amount four-year
         subordinated convertible debentures. The investors have the option to
         purchase an additional $10 million of similar debentures and Alliance
         has certain rights to require the investors to purchase the additional
         debentures.


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<PAGE>

SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           ALLIANCE PHARMACEUTICAL CORP.
                                                   (Registrant)

                                                  \s\ TIM T HART
                                           -----------------------------
                                                    Tim T. Hart
                                              Chief Financial Officer
                                                   and Treasurer

Date:  November 3, 2000



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